SAFEGUARDING THE RIGHT TO BEQUEATH AND INHERIT – ISSUES IN US, ISRAELI, AND JEWISH ESTATE PLANNING LAW

The Fundamental and Universal Right to Bequeath and to Inherit

The right of inheritance is enshrined as a matter of US federal law as well as that of all of the several states of the United States of America. It is also enshrined in Israeli law, where I practice, as well as Jewish law or Halacha. Yet it is universal right as well, one of the few globally recognized rights in practice.

That is not to say that the right of inheritance has not been limited to a great degree: In the United States, as a matter of both federal and state law, estates above a certain threshold are subject to significant inheritance taxes — currently the federal threshold for exemption is $5.35 million adjusted for inflation (and now approaching $5.5 million), beyond which federal estate tax is approximately 40% (of course depending on which assets are considered a part of the gross estate and which are not), as well as significant state estate taxes depending on which jurisdiction is considered the situs especially of real estate. In this sense, limitations on the right to inherit are primarily of concern to high-net-worth individuals, although some of the US States, including New York, have set the exemption threshold much lower than on the federal level: In New York, the exemption for state-situs property such as real estate stands at $2 million, and if the property is worth $2,000,001, then the entire $2 million is subject to inheritance taxes. For non-resident non-US-citizens, virtually everyone is affected, not just high-net-worth individuals. This includes Israeli citizens without dual citizenship. For foreigners who do not live in the United States of America, the federal threshold for exemption from inheritance tax is only $60,000 adjusted for inflation, which means that the heirs of a foreign citizen with US-situs assets such as real estate (but also many kinds of financial assets and investments) lose 40% of their US-based assets to US inheritance taxes above the exempt $60,000.

Meanwhile, in Israel there are ongoing discussions about the advisability of instituting a US-style estate tax, in part to obviate the inequalities that result from accumulated wealth over generations. Those discussions have yet to result in the Knesset passing an Israeli inheritance tax, but Israeli tax attorneys are always aware of the risk of that occurring and attempt to anticipate what such a tax might look like.

In addition, the right to inherit as a matter of Jew law or Halacha has also been largely changed in practice: The traditional approach in Jewish law of giving a double portion to the first-born male heir has been supplanted by “halachic wills” that essentially enshrine the wishes of the deceased in Halacha and create immediate financial consequences for those seeking to get around the civil will by challenging the civil will in Rabbinical court. Thus, the right of a first-born mail to a double portion in practice has become a recommendation on the part of Rabbinical courts rather than a binding right.

In a twist of the universally enshrined right to bequeath an inheritance and of heirs to inherit is the converse right as well: The right to expressly waive the right to inherit. Thus, in both the US and Israel, heirs can expressly waive their right to inherit in favor of other heirs. Although this right may appear counter-intuitive (why would anyone renounce inherited money), this right is exercised more often than we might expect. The decision to waive an inheritance can be made for a number of reasons: For personal family reasons (such as benefiting another heir), to avoid negative tax consequences, or to avoid the money going to creditors.

The Rights of Minors and Others Without the Capacity to Waive or Otherwise Exercise the Right to Inherit

Yet where the beneficiary of a will or trust is a minor, the issue becomes more complicated: Under both Israeli and US law (which means for purposes of trusts and estates law the law of the several states), minors do not have capacity to waive their rights in either trusts or estates. This is due to the need to protect the rights of minors until they reach the age of majority, when they are deemed to be sufficiently mature to make their own decisions. In Halacha, the Sages subjected those seeking to reach the assets of minors to a special oath to ensure that dishonest practices would not rob orphans of their possessions (until those who sought to do so were no longer deterred by the prospect of an oath, at which time the practice lapsed). It is therefore almost impossible for the minor him or herself to waive rights in a trust or estate before the age of majority. State courts that have addressed the issue have been reluctant to allow minors to waive their rights to benefit from a trust naming them as beneficiaries, even where the legal guardians of those minors consent to waive the rights of the minors to benefit from the trust. Thus, even legal guardians are to some extent suspect in the eyes of state trust law. In Israel as well, this principle remains almost axiomatic. However, because Israeli currently has no estate or inheritance tax, this issue is somewhat mitigated.

The situation is equally complicated in the case of a non-minor beneficiary who suffers from common forms of incapacity of other kinds: substance abuse, debilitating mental health issues, gambling addiction, etc. In such a case, provision is often made for the appointment of an individual to ensure that distributions or withholding of funds from an estate are made for the good of the beneficiary. In the context of wills in both the US and Israel, this is often the role of the Executor of the will per the terms of the will itself. In the case of a US or foreign trust, this is frequently the role of the trustee as prescribed in greater or lesser detail by the document creating the trust.

In the US, what is typically done to protect beneficiaries of many kinds is to provide the trustee or trustees with broad powers to distribute or withhold assets from a minor, and indeed adult beneficiaries as well, under a broad set of circumstances, but typically where such distribution would be subject to negative personal consequences, negative tax consequences, seizure by the beneficiary’s creditors, or even negative financial aid decisions by schools and universities that might cause the beneficiary to lose money for education that he or she might otherwise receive. Prudent estate planners will build in such broad discretion into their trust instruments to ensure maximum ability of trustees and trust protectors to serve the trust beneficiaries’ needs.

The Fundamentally Personal Nature of Estate Planning: A Need for Personal Solutions

The disposition of a person’s assets after death is a deeply personal choice and one that requires sensitivity and responsiveness on the part of estate planners. A prudent estate planner will suggest an array of choices to the person planning for inheritance in order to ensure that those inheriting get the maximum desired benefits and the minimum level of undesirable consequences, especially avoiding unnecessary tax consequences (such as legally avoiding the estate taxes discussed above) but also taking into account the particular needs of heirs and the desires of the testators or grantors of trusts. In Halacha, this principle is enshrined the principle that a dying person’s wishes are sacrosanct and must be followed. It is also a principle in enshrined in both Israeli and US law and should be the primary goal of the estate planning attorney in serving the needs of the client. This is especially so of those with minors for whom they seek to provide in estate and inheritance planning, but it is fundamental to all sound planning for all beneficiaries, including adults of all levels of capacity and incapacity.

It is impossible to create a one-size-fits all trusts and estates solution. Instead, a person’s financial planning, family, priorities for charitable giving, and tax consequences and preferences need to be taken into account to properly design a wills, trusts, and estates structure that honors both the estate and tax planning needs of the person designing that structure and using the provisions of applicable law, including Israeli, US federal and state, and if applicable Halacha as well to achieve an optimized but highly personal result.

*In accordance with Treasury Regulations Circular 230, any tax advice contained in this article was not intended to be written to be used, and cannot be used for the purposes of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein. This article is also not meant to constitute legal advice for a particular client, for which consultation with a qualified attorney is required.